Eugene Grygo, Chief Content Editor, FTF News
Just in case you forgot, we are entering Comprehensive Capital Analysis and Review (CCAR) and Dodd-Frank Act stress test season.
Earlier this month, the Federal Reserve Board released scenarios for the 2018 CCAR and Dodd-Frank Act stress test exercises and has published instructions for firms that face CCAR compliance. In particular, the CCAR process covers the capital planning practices and capital adequacy of “the largest U.S. bank holding companies, and large U.S. operations of foreign firms, using the firms’ planned capital actions such as dividend payments and share buybacks and issuances,” according to the Fed. The Dodd-Frank Act stress tests focus on long-range assessments of capital sufficiency “using standard assumptions across all firms.”
“This year, 18 of the largest and most complex firms will be subject to both a quantitative evaluation of their capital adequacy and a qualitative evaluation of their capital planning capabilities, including five foreign firms with U.S. operations for the first time,” according to Fed officials. “Twenty firms with less complex operations, including the U.S. operations of one foreign firm, will only be subject to the quantitative portion of CCAR.”
The firms and Fed officials will run the stress tests and use three scenarios: “baseline, adverse, and severely adverse,” officials say.
“For the 2018 cycle, the severely adverse scenario is characterized by a severe global recession in which the U.S. unemployment rate rises almost 6 percentage points to 10 percent, accompanied by a steepening Treasury yield curve,” Fed officials say. “The adverse scenario features a moderate recession in the United States, as well as weakening economic activity across all countries included in the scenario.”
The adverse and severely adverse scenarios use hypothetical sets of events intended to gauge the strength and resilience of banking organizations. “They are not forecasts. The baseline scenario is in line with average projections from surveys of economic forecasters. It does not represent the forecast of the Federal Reserve,” according to the Fed.
Each scenario uses 28 variables, including “gross domestic product, unemployment rate, stock market prices, and interest rates — encompassing domestic and international economic activity,” according to the Fed. “Along with the variables, the Board is publishing a narrative that describes the general economic conditions in the scenarios and changes in the scenarios from the previous year,” officials add.
“As in prior years, six bank holding companies with large trading operations will be required to factor in a global market shock as part of their scenarios. Eight firms with substantial trading or processing operations will also be required to incorporate a counterparty default scenario,” according to the Fed. “To support the transition to stress testing for foreign firms that are new to the evaluation, the U.S. operations of six foreign firms with significant trading activity will be subject to a simplified global market shock this year and the complete global market shock next year.”
The new set of instructions provides details on the major differences between the CCAR 2018 instructions and those for last year:
- Regulatory capital rules;
- Impact of the “Tax Cut and Jobs Act;”
- Market risk components for certain U.S. intermediate holding companies of foreign banking organizations (IHCs);
- Attestation requirements for LISCC firms:
Officials also have new instructions “about the Federal Reserve’s quantitative assessment for large and noncomplex firms. Large and noncomplex firms are required to submit capital plans and are subject to the quantitative assessment, but are not subject to the qualitative assessment. The details of the review process for large and noncomplex firms are described in a supervisory communication sent to each firm.”
Officials are requiring firms participating in the CCAR process to submit their capital plans and stress testing results to the Federal Reserve on or before April 5, 2018. “The Federal Reserve will announce the results of its supervisory stress tests by June 30, 2018, with the exact date to be announced later,” officials add.
You can access documents and more here.
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